Memorandum submitted by Ofgem
1. The Committee has asked Ofgem to provide
further information on several issues raised in its follow-up
inquiry into energy prices.
COMPLAINTS BY
SMALL BUSINESSES
2. The Government introduced changes to
consumer representation in the energy sector under the Consumers,
Estate Agents and Redress (CEAR) Act 2007. The extent of the arrangements
provided for under that Act, and the customer groups to which
they apply, are set out in an Order made by the Secretary of State.[1]
3. In a consultation document in July 2007,
the Government set out its views on the extent to which the new
redress scheme should apply to business customers.
"It is likely that many large and medium-sized
business consumers will have sufficient commercial power to resolve
problems directly with regulated providers and will not want to
seek redress through statutory schemes. Their services may be
provided under contracts, backed up by specialist staff with the
skills to monitor and assess the performance of the service providers
against these contracts. These business consumers are likely to
be able to use their commercial position to resolve complaints,
or to have the freedom and expertise to seek alternative service
providers. For such consumers, it could be argued that redress
schemes would not provide any significant benefit, and accordingly
that they should not be included within the scope of the redress
schemes|Taking as the starting point the inclusion within the
scope of all domestic consumers, but excluding large businesses,
there is a need to identify an appropriate threshold to separate
those businesses which should be included from the "large"
businesses. There is an argument that micro-enterprises have the
same lack of commercial power as domestic consumers. In gas and
electricity markets, micro-enterprises may have similar levels
of energy consumption as larger domestic consumers, for example.
And small business consumers may face very similar problems and
have similar complaints to those of domestic consumers."
[2]
4. Following consultation, and recognising
the concerns of consumer representatives that the definition of
micro businesses should not be cast too narrowly, the Government
defined micro businesses as those with an annual consumption of:
— electricity of not more than 55,000
kWh; or
— gas of not more than 200,000 kWh;
or
— fewer than 10 employees (or their
full time equivalent); and
— an annual turnover or annual balance
sheet total not exceeding Euros 2 million.
5. BERR's impact assessment for the redress
schemes in July 2007 stated that in 2005 95.2% of all enterprises
in the UK had fewer than 10 employees.
6. The statutory complaints handling standards
set by Ofgem, and to which all suppliers and network companies
are bound, mirror this definition. If a micro business falling
within the definition has a complaint, it should be treated in
accordance with the complaints handling standards. We expect this
to lead to a marked improvement in the way complaints are dealt
with by suppliers. We are currently conducting an audit of suppliers'
performance in this area. If the complaint is not resolved to
the customer's satisfaction, they now have recourse to the Energy
Ombudsman. Under the complaint handling standards the supplier
is required to alert the customer to their right to go to the
Ombudsman.
7. In our view the fact that small businesses
are now protected by complaint handling standards and have recourse
to a statutory ombudsman scheme should result in better protection
for these customers overall.
8. For the small number of business customers
where the issue is urgent and cannot wait for the Ombudsman to
resolve there is additional protection. If the micro business
is vulnerable or threatened with disconnection or has actually
been disconnected then Consumer Focus has a duty to provide assistance
and has established its extra help unit to do this. Consumer Direct,
which is part of the Office of Fair Trading, may also offer advice
but they are not obliged to do so. They are principally a service
for domestic consumers.
9. The one concern that we have voiced about
this arrangement is that it is not clear how a small business
customer facing disconnection would access the support of Consumer
Focus as they have made clear that they will not accept direct
contacts and would expect all customers to come to them via Consumer
Direct. Consumer Focus have agreed to review this arrangement
in the new year to ensure that it is not preventing these customers
from accessing their service. Suppliers have an obligation under
the complaints handling standards to alert customers to other
sources of help available, which will be of particular importance
where the customer is facing disconnection.
10. In Consumer Focus' work plan they have
undertaken to determine the needs of micro-enterprises as consumers,
with particular regard to their energy and postal needs and the
role of Consumer Focus in representing them.
11. Mr Binley asked about bilateral meetings
between Ofgem and the Federation of Small Businesses and the British
Chambers of Commerce. We met bilaterally with the FSB on 13 November
2008 and with the BCC on the same date. These meetings are in
addition to our wider regular meetings with the Small and Medium
Users Group and the Large Users Group.
SUBSIDIES TO
LARGE USERS
IN OTHER
EU MEMBER STATES
12. The European Commission is conducting
formal investigations under EC Treaty state aid rules into potential
aid to large and medium-sized companies in France and Spain in
the form of artificially low regulated tariffs that are financed
by the state directly or indirectly. The investigation into Spain
was launched on 25 January 2007[3]
and the investigation into France was launched on 13 June 2007.[4]
13. French electricity consumers can buy
their electricity either on the liberalised market or on the regulated
market. On the regulated market, they buy the electricity from
distributors designated by the French State, at regulated prices.
The regulated prices have been considerably lower than the electricity
prices on the liberalised market. Since the beginning of 2007,
clients who had left the regulated market can return to it and
pay electricity prices that are above the original regulated prices,
but still below the market prices. The system appears to be financed
mainly by the state-owned company Electricité de France
(EDF) and by contributions levied on all French electricity consumers
and administered by the state.
14. The Commission is concerned in particular
about the potential distortion of competition entailed in the
"green" and "yellow" tariffs which are the
lowest ones and applicable to medium and large companies, and
can effect mostly in the markets for products made by energy-intensive
companies. The investigation does not cover the "blue"
tariffs (applicable mainly to households and small companies)
since they do not seem to grant any economic advantage to the
relevant companies.
15. In 2005 Spain set artificially low regulated
tariffs for energy intensive, large and medium industries. The
Commission is concerned that these regulated tariffs might have
provided significant amounts of operating aid to these industries
and, to a certain extent, to the electricity incumbents, who could
have been over-compensated by the Spanish state and could have
made an abnormal profit on the arrangements. The low tariffs led
to a deficit of
3.8 billion in the electricity system, which will
have to be paid back over 14 years by adding a new charge to the
electricity bill of all Spanish consumers.
16. The Commission is concerned about the
potential distortion of competition in the product markets of
the energy intensive, large and medium industries, and also has
doubts about the compatibility of the potential aid, which had
the effect of providing a guaranteed profit to the electricity
incumbents who offered these industrial tariffs. Another concern
is that, because only the traditional Spanish electricity incumbents
were allowed to provide low regulated tariffs, potential new suppliers
may have been prevented from entering the Spanish electricity
market and that the scheme may have prompted some recent market
entrants to discontinue their activities in Spain, thus eliminating
the benefits that new entrants were bringing to consumers.
USAGE OF
THE LNG TERMINAL
AT THE
ISLE OF
GRAIN
17. There have been concerns in industry
that the Liquefied Natural Gas (LNG) terminal at the Isle of Grain
is being under-utilised. Since June 2005, there have been 183
berthing slots at Grain. 80 of these have been used by the capacity
owners, BP/Sonatrach. None have been used by third parties.
18. If the owners of the slots at these
terminals are not using them, we think that others who want to
bring LNG to Britain should be able to do so. That is why we demanded
`use it or lose it' arrangements at Grain. If the owners are not
going to use a slot, it must be offered to the secondary market
10 days in advance.
19. We held a consultation late last year
and said that any issues surrounding the usage of the terminal
should be identified and addressed as a matter of urgency. We
received 5 responses. Centrica and National Grid said they thought
the notice period was sufficient. The Chemical Industries Association
and Ineos Chlor said they though the notice period was not long
enough, but they did not provide any evidence. Energywatch did
not mention the notice period.
20. Members asked about the comparable arrangements
at the LNG terminal at Zeebrugge in Belgium. If the capacity owners
at Zeebrugge do not intend to use a slot, they must offer it to
third parties on the secondary market with a 2 month notice period.
This compares with 10 days at Grain. However, gas for delivery
at Zeebrugge is primarily brought in under long term contracts.
According to Fluxys, the number of slots available to third parties
on the secondary market for December, January and February is
0.
21. It is our assessment that a similarly
long notice period would be unlikely to increase the amount of
LNG delivered to the Isle of Grain.
— The fact that more LNG did not come
to Britain in winter 2007-08 can be explained in part by the higher
prices on offer in other LNG importing countries. For example,
demand and prices in Asia were much higher than spot prices in
Britain at the National Balancing Point (NBP), reflecting nuclear
outages in Japan and high demand from China and India. Most Asian
countries have no alternative source of natural gas and will therefore
pay whatever is needed to secure it. Closer to home, shortages
in Spain and Turkey meant that any available cargoes in the Atlantic
Basin went to these markets in preference to the UK.
— In addition, the supply side has
been much less forthcoming in its development than forecast between
5 and 10 years ago. Spot cargos have not come become common. As
the Minister stated in his oral evidence on 24 November, most
LNG is delivered around the world under long term contract.
— The LNG market in Belgium is very
different from Britain. Zeebrugge is the only Belgian LNG terminal;
no new ones are due to be completed soon; and the tariff for using
it is regulated. In Britain, the terminal at Grain has just expanded;
and two new terminals are on the way at Milford Haven. We therefore
expect to have three terminals which can compete for spot cargoes.
— At Grain 1, 2, and 3 (2 and 3 are
not yet in commercial operation) there are more capacity holders.
At Zeebrugge, Qatar/Exxon Mobil own 50% of the capacity for 20
years from 2007; Distrigas own 28% of the capacity for 20 years
from 2007; and Suez Tractabel own 22% of the capacity for 15 years
from 2007. At Grain, the Phase 1 primary capacity holder is BP/Sonatrach
(100% capacity). Phase 2 capacity holders are Centrica (40%),
Gaz de France (38%) and Sonatrach (22%). Phase 3 capacity holders
are Centrica (35%), E.ON (25%) and Iberdrola (40%).
— When we held a consultation and a
seminar last winter, nobody presented any evidence that the notice
period was responsible for third parties not using the slots at
Grain.
22. However, we continue to keep this issue
under review and we aim to hold another seminar in February for
LNG terminal operators and their capacity holders to communicate
with market participants. In addition, it is worth noting that
two new British LNG terminals (Dragon and South Hook) are due
to open at Milford Haven soon. Once the Milford Haven and Grain
II facilities are in operation, if fully utilised the LNG terminals
could provide up to 27% of UK annual gas demand.
7 December 2008
1 SI2268 Back
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http://www.berr.gov.uk/files/file40283.pdf Back
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http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/93&format=HTML&aged=1&language=EN&guiLanguage=en Back
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http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/815 Back
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